For many people, credit cards are the embodiment of evil. In the wrong hands they can lead to reckless spending, crippling debt, and eventual financial ruin. However, the “evil” tag is often unfairly applied to any tool that, when used responsibly, can be a positive for many people.

Credit cards are such a tool; whether they are used for good or evil is determined by the knowledge and responsibility of the user. For those living below their means, paying off balances monthly, and carrying few cards, credit cards are valuable and helpful. In the right hands credit cards can help to build credit, protect your money, secure discounts and benefits, and assist you in an emergency.

Building Credit

A person’s credit score, a number between 300 and 850, indicates their trustworthiness to potential lenders. The score is determined by how consistently and reliably someone uses his or her credit. Six factors determine a person’s credit score:

% of on-time payments

Open card utilization

Negative marks (accounts in collection, bankruptcies)

Average age of open accounts

Total number of accounts

Total hard credit inquiries

Regularly using credit cards and paying off balances shows responsible use of credit and improves a person’s credit score. To build positive credit with a credit card follow these simple steps:

Monitor your credit score to ensure there are no mistakes on your credit report

Make payments on time

Keep available credit high

Keep balances low

Protecting Your Money

Credit cards create a barrier between merchants and your money. They provide fraud protection and allow you to dispute charges without placing your cash in limbo. Some debit cards provide limited fraud protection, but you can bid your cash adieu in the case of fraud. With credit cards, you are not held responsible for charges made by someone other than you and your accounts can be quickly and conveniently frozen in the event of lost or stolen cards.

Securing Discounts and Benefits

Many credit cards offer rewards to encourage usage. This can lead to unnecessary spending for reckless users, but can also be a boon to those with more responsible fiscal habits. Credit cards can provide everything from airline miles and discounts on large purchases like vehicles to cash back on everyday purchases like groceries and gas. Many large retailers also offer their own credit cards that provide discounts on purchases.

Emergency Assistance

Ideally, everyone would have six to twelve months of emergency funds available at all times. Unfortunately, that is not the case for everyone and emergencies happen. Credit cards can provide a safety net when emergency funds are needed. In anticipation of unforeseen emergency events, always keep your balances low and available credit high so you can utilize that credit when it’s most necessary.

A good credit score is crucial to purchasing real estate, but even if you’re not in the market for a new home, working to increase your credit score is incredibly important. Essentially, your credit score is an indicator to potential lenders about your history of handling debts. Credits scores are calculated by three agencies (Equifax, Experian, TransUnion) and range from 300-850, with lower scores indicating a higher risk to lenders.

Your credit score can be referenced when buying a car, renting a home or apartment, applying for a credit card or to be a member of a credit union, among other things. If you’re perceived as a higher risk, you can be charged higher interest rates (check out this infographic on credit.org for some estimated numbers) or even denied loans. So, it’s very important to know what betters and what hurts your credit score. Here are four tips to keep your credit score moving up. [Read more…]